Proactive Tax Planning 2 of 6

No one wants to pay more than his or her fair share in taxes. Nor should you pay income taxes on money you’re not actually spending, if you don’t have too. So it makes sense that we as taxpayers intuitively want to defer taxation on assets until the latest possible moment. But for the taxpayers who may never need to use their IRA money for their living expenses, having a large tax-deferred retirement account is just a ticking time bomb of burdensome income taxes in the future. That’s where using a Roth IRA conversion strategy may come in handy.

While this strategy does require you to pay income taxes at the time of transfer from Traditional IRA to Roth IRA, there are many reasons to consider transferring assets from the “tax-deferred bucket” to the “tax-free bucket.” Here are 8 reasons or situations that make the case for accelerating your income taxes.

For wealth accumulation reasons:

Tax-free growth- If you pay the income tax on the IRA conversion from taxable savings (like your bank account), you benefit greatly from the Roth IRA because the entirety of your converted balance will now have the ability to enjoy tax-free growth moving forward.

Option to recharacterize- “Heads you win, tails you tie.” There’s a rule that allows you 20/20 hindsight to undo conversions that were not advantageous based on short-term investment performance.

For income tax reasons:

Early retirement – If you’re a high net worth taxpayer who retires early, there may some early retirement years when your income stream and tax bracket are significantly lower than it was while working and lower than they will be when your RMDs occur.

RMDs – The Roth IRA does not fall under required minimum distribution rules at age 70½, effectively allowing for additional tax deferral.

Large deductions- If you have favorable tax attributes like charitable deductions, net operating losses or investment tax credits, you can help offset the majority of the taxes that otherwise could be owed on conversion income.

Tax brackets- Because federal tax-brackets are more advantageous for married couples filing joint returns than for single individuals, future Roth IRA distributions won’t cause an increase in tax rates for the surviving spouse when one spouse is deceased because distributions are tax-free.

For estate planning reasons:

For your heirs- Post-death distributions to beneficiaries are tax-free too.

Generation Skipping Trust (GST)- If transferring assets to grandchildren is your goal, the Roth IRA is the most powerful asset with which to fund a GST exempt trust.

The Roth IRA conversion is an advanced planning strategy that certainly isn’t for everyone. But if you think that this may be an option for you, feel free to give us a call. We’re here to align your personal values, vision and wealth.

It is important to note that Traditional IRA account owners should be sure to consider the tax ramifications, age and income restrictions before executing a conversion from a traditional IRA to a Roth IRA.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Haas Financial Group, US Financial Advisors and LPL Financial do not provide tax advice or services.

Securities offered through LPL Financial, Member FINRA and SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and Haas Financial Group are separate entities from LPL Financial.